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After two years of meager growth, India's outsourcing leaders are expected to be more fully employed this year. The enthusiasm for the information-technology specialists already has driven the stocks up, particularly in the past few weeks, but analysts say there's still room for the shares to improve.

"This could be the year when global corporate IT spending picks up and lifts all boats in the Indian IT-services space," says Credit Suisse's Anantha Narayanan. Analysts at technology researcher Gartner recently forecast IT-services spending worldwide would grow 5.2% this year, compared with just 1.8% last year as recovery takes hold in the U.S. and more signs of stability appear in Europe. Over the past two years revenue growth at the Indian outfits has been rising at about half the longer-term pace of 16%.

A cyclical lift also could accelerate some structural changes already under way. Mitali Ghosh, an analyst for Bank of America Merrill Lynch in Mumbai, says the industry's basic business model has changed. It had become "commoditized and there was very little differentiation between Indian firms, Western firms, or clients' own in-house units."

As a result, Indian vendors have begun diversifying services as well as markets and trying to differentiate their offerings in higher-end niches like application development and enterprise solutions, says Ghosh. Indian companies have been winning market share in some areas from weakened U.S. players like
Hewlett-PackardHPQ -0.32658393207054215%Hewlett-Packard Co.U.S.: NYSEUSD30.52
-0.1-0.32658393207054215%
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11597310AFTER HOURSUSD30.58
0.060.1965923984272608%
Volume (Delayed 15m)
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328248
P/E Ratio
12.208Market Cap
55131787819.0987
Dividend Yield
2.3066841415465267% Rev. per Employee
355334More quote details and news »HPQinYour ValueYour ChangeShort position
(ticker: HPQ). "The turning of the cycle, improving productivity as well as the ability to move up the value chain, is helping hold margins," she says.

"We expect a significant uptick this year and some of the margin challenges are now probably behind us," Ghosh says. She looks for margins for top players—Tata Consultancy Services (TCS.India) and Infosys (INFY.India)—to hold steady this year near 26%-27%.

Historically a pickup in corporate IT spending helps these stocks two ways, says Narayan. "There are earnings upgrades as well as potential re-rating and expansion of earnings multiples," he notes.

Based on some of the changes, CLSA Asia-Pacific Markets' Nimish Joshi just upgraded the entire sector to Overweight from Underweight. He believes the sector could be nearing an inflection point. Infosys, a laggard last year, is considered the most leveraged to such a pickup given its higher exposure to discretionary budgets. The stock has gained 9% in the past year and sells at a multiple of 17.7 times.

Narayan favors Tata and HCL Technologies (HCLT.India). "We like Tata because even in a more challenging environment last year it delivered fairly strong revenue growth of around 14% or so," he says. "We believe the execution capability of Tata is clearly superior to other peers." Boosted by a 12% gain in the last month, the stock has risen 26% over the past year. Credit Suisse has a target price 1,450 rupees (US$26.67) target price, which gives it about 9% more upside. It sells at a multiple of 16 times fiscal 2014 earnings.

Also rising 12% in the past month, HCL has soared 68% over the past year. Narayan has a 765-rupee target price, or 8% above recent levels. "We like HCL because they have very strong capability in infrastructure management, which is one of the fastest-growing areas for the offshore segment" of IT services, he says. Moreover, its margins are expanding. Despite the run-up, the stock still trades at about 12 times fiscal 2013 earnings estimates.